In June 2021, Ms. Kardashian posted an ad in an Instagram story for a crypto token known as EthereumMax or EMAX. Kardashian stated that the post was not financial advice and included the disclaimer “#AD” in the post, but did not disclose any further details about her remuneration for the promotion. The SEC settlement states that Kardashian was paid USD250,000 for the post.
According to the SEC, EMAX is a security because marketing materials and public statements of EMAX affiliates would lead purchasers of EMAX to expect to profit from their investment in the token based on the efforts of EMAX’s management. According to the SEC, then, EMAX is subject to the laws and regulations set forth in the Securities Act.
Ms. Kardashian’s promotion of EMAX was thus subject to the anti-touting provision in Section 17(b) of the Securities Act. Section 17(b) makes it unlawful for any person to:
“…publish, give publicity to, or circulate any notice, circular, advertisement, newspaper, article, letter, investment service, or communication which, though not purporting to offer a security for sale, describes such security for a consideration received or to be received, directly or indirectly, from an issuer, underwriter, or dealer, without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof.”
In other words, when a person is paid to promote a security, they must disclose the amount they are being paid.
Under the terms of the settlement, Ms. Kardashian must disgorge the entirety of the USD250,000 she was paid for the promotion, plus USD10,415.35 in interest, and pay a civil money penalty of USD1,000,000. Kardashian is also prohibited from promoting crypto token securities for three years. The settlement states that Kardashian cooperated with the SEC’s investigation into the matter and must continue to do so.
Ms. Kardashian’s promotion of EMAX is also the subject of a class action civil suit in California. In that case, plaintiffs allege that Kardashian and others, including NBA star Paul Pierce and boxer Floyd Mayweather, were involved in a pump-and-dump scheme that defrauded investors in EMAX.1 Kardashian has moved to dismiss the complaint, and her motion is pending. It is not clear if the SEC is investigating any fraud related to EMAX, but the cooperation undertakings in Ms. Kardashian’s settlement agreement may suggest the SEC is investigating EMAX more broadly.
Adverse actions by courts, federal and state regulators, self-regulatory organizations, and by foreign governmental authorities can result in negative consequences beyond the terms of a settlement or the resolution of the adverse action. These negative consequences are referred to as “collateral consequences” and can range from disclosure of the adverse action to bars from the securities industry. As a result and by way of example, a person interested in a continuing career in the securities industry needs to consider any potential collateral consequence and take any available steps to address the collateral consequence prior to, or at the time of resolving the adverse action.
Given the recent launch of her private equity firm, SKKY Partners,2 if the firm were to register as an investment adviser, depending on Ms. Kardashian’s role with the firm, this event may need to be disclosed on any future Form ADV filing.
What Does This Mean for Crypto Influencers?
Gary Gensler, Chair of the SEC, has stated, “Ms. Kardashian’s case also serves as a reminder to celebrities and others that the law requires them to disclose to the public when and how much they are paid to promote investing in securities.” Gensler also released this video warning investors about celebrity endorsements in the crypto space.
The key question for influencers, celebrities and other promoters who are paid to tout a crypto token, is whether the token is a security. Under the SEC’s Howey test, a digital asset will be considered a security if it is (1) an investment of money; (2) in a common enterprise; (3) with the expectation of profits derived from the efforts of others. Mr. Gensler has recently stated that he believes “the vast majority” of crypto tokens are in fact securities.3 This position has not been tested in the courts, but demonstrates the SEC’s aggressive commitment to regulating the cryptocurrency space and serves as a warning to would-be influencers and other promoters.
This is not the first time the SEC has pursued anti-touting claims against celebrity influencers promoting crypto tokens and it is unlikely to be the last. In November 2018, the SEC settled with boxer Floyd Mayweather and performer DJ Khaled for promoting the initial coin offerings of various crypto tokens in exchange for payments from Centra Tech Inc.4
And private litigants will continue to pursue influencers they perceive to be involved in crypto token schemes that lose money. In August 2022, Plaintiffs in Florida filed suit against Mark Cuban and the Dallas Mavericks in relation to the Voyager Digital collapse, alleging that Cuban encouraged plaintiffs to invest in the Voyager platform despite knowing it operated like a Ponzi scheme and misrepresented the risk of investing in the platform.5 In another recent action, multiple plaintiffs filed lawsuits against social media influencer Jake Paul, former-Backstreet Boy Nick Carter, and others in relation to another alleged pump-and-dump involving the digital asset Moonbeam.6
Tips for Influencers
The conduct set forth in Ms. Kardashian’s settlement is not nearly as egregious as the conduct the SEC pursued in relation to Forsage in August. Though private litigants have alleged that Kardashian and EMAX’s management were involved in a fraudulent scheme, the SEC does not suggest that there was any fraud in her promotion of the token. This suggests that the SEC may take a more aggressive position on influencers and promoters going forward. Influencers should obviously avoid intentionally promoting frauds and deceiving their followers, but they should also:
- Watch out for red flags: influencers should be careful to avoid creating the appearance that they are promoting a scheme they know to be a fraud or that exhibits red flags. Potential red flags may include, but are not limited to, promises of guaranteed incomes or excessive returns, anonymous or un-doxxed founders or management, unaudited smart contracts, and a failure to identify the source of any income.
- Disclose conflicts of interest: if news alerts and recommendations appear to a regulator to be disguised front-running and pump-and-dump schemes, content creators could be exposed to serious liability. When discussing an asset or platform that the content creator is invested in, it is advisable to disclose such investments to avoid a conflict of interest and potential legal risk. Content creators should likewise disclose any affiliation with the assets and platforms they discuss, including when they are being paid for the promotion, and how much they are being paid.
- Influencers who are approached by the SEC or another agency or served with a subpoena or civil complaint should seek counsel to discuss their options, including, as noted above, any potential collateral consequences.
Regulators have demonstrated that they are taking the digital asset space seriously, and will continue to be active on the enforcement front, even against those who play a less-direct role in conduct that regulators view as problematic. In this enforcement environment, the ubiquitous influencer disclaimer to “do your own research” or DYOR may not be enough to deter regulators or plaintiffs from pursuing actions where they believe they see evidence of intentional fraud, and the hashtag “#AD” will not be enough to avoid running afoul of the anti-touting provisions of the Securities Act.
Would Kim have fared better in the UK?
The short answer is yes … at least for now. Financial promotions relating to crypto investments do not currently fall within the UK financial promotions regime, policed by the Financial Conduct Authority (FCA). Although that is expected to change.
The FCA recently consulted on new rules to strengthen the UK financial promotions regime, particularly in relation to high-risk investments. The new rules start to come into force from the end of 2022. They cannot be applied to financial promotions relating to cryptoassets until the government passes new legislation to bring qualifying cryptoassets into the UK financial promotions regime, which should happen in the next year or so. However, once in force, the new rules are expected to place the onus on relevant crypto-businesses to ensure their promotions are clear, fair and not misleading, rather than focusing on celebrity endorsers. This is consistent with the approach taken by the FCA earlier this year in its intervention against the investment app Freetrade.
Finally, although Ms Kardashian was able to avoid accepting liability through the SEC’s “neither-admit-nor deny policy”, this option would not have been available to her in the UK. The FCA will only settle enforcement investigations where the ‘offender’ admits liability – doing so often exposes a firm to reputational and litigation risks. With this in mind, now would be a good time for crypto-businesses to review their marketing arrangements.
1. In re Ethereummax Investor Litigation, 2:22-cv-163 (C.D. Cal.)
5. Robertson v. Cuban, 1:22-cv-22538 (S.D. Fla)
6. Merewhuader v. Safemoon LLC, 2:22-cv-1108 (C.D. Cal)